Leasing To A Franchise? | May 2, 2011

Clearly, franchises (especially nationally recognized ones) can be a huge asset to any development due to their ability to generate traffic, visibility and, hopefully, juicy percentage rents. However, if you have ever had the opportunity to work on a lease or development agreement with a franchisee or franchisor of a national powerhouse, you quickly realize that there are numerous issues (other than leverage) which are unique to this type of business and, if addressed correctly, will prove to be a benefit to both the landlord and tenant over the long haul. I think the most complex issue I ever addressed was the unfortunate demise of the franchisee. This gets really ugly especially when the franchise is a good one with a stellar reputation but failed primarily due to the incompetency of the franchisee. The last thing the franchisor wants is a very visible and public closing which could be a publicity nightmare. I represented the developer in that case and fortunately I was lucky enough to have astute parties involved so, while it took some time to get a new franchisee on board, both the developer and the franchisor absorbed some of the costs to resolve the matter. They both took a long-term approach to the viability of the project and it worked out well. This is not always the case, so both parties need to address, at the outset, as many contingencies as possible to assure a favorable outcome. This articleSP-#3389981-v1-Leasing_to_Franchisees discusses several issues of importance to franchisees, franchisors and landlords. Surprisingly, it’s a short list, but an important one.

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Hi Steve.
Great post about franchisee leasing issues. In my representation of franchisees negotiating leases in Florida, I have found many of the same issues. I have also sometimes been faced with landlords who at first fail to recognize the difference between the franchisor and the franchisee – they may think they are dealing with a large public company when in fact their tenant is a single purpose LLC

Thanks for writing this — publishing my own blog, I know the costs in time and money involved, and I just wanted to leave a comment here, letting you know that your blog, as well as this post, are appreciated!

Steve- Hello fellow Baylor Bear! Thanks for being pragmatic about franchisees in your post. I’m a retail broker in Denver, specializing in franchise-representation. Landlords have varying reactions to franchisees, because after all they’re not corporate gaurantees.. The branding is definitely better than mom and pop, and I believe it boils down to minimum required liquidity and quality training provided by franchisor. For example, Culver’s (a client of mine) requires $400k-$750k liquidity and 16 weeks of training!!! Another indication of a good franchise is when the franchisee goes under, the franchisor purchases the location as a corporate store. Will you be at ICSC? Please check out my blog too: http://www.retailleaseonlife.com